CPI exceeds target range, rising 6.8%

CONSUMER inflation moved further outside the Reserve Bank’s 3%-to-6% target range last month.

The consumer price index (CPI) increased 6.8% last month compared with a year earlier‚ Statistics SA said yesterday, from November’s 6.6%.

Trading Economic had forecast a 6.8% increase and the Bloomberg consensus was for a 6.5% rise.

The Reserve Bank’s outlook for CPI inflation is that it will average 6.4% this year, coming back within the 3% to 6% target range next year, when it is seen slowing to 5.8%‚ and easing further to 5.5% in 2018.

Food inflation is still running high in South Africa‚ due to the lagged effects of last year’s devastating drought.

Food and non-alcoholic beverages inflation was 11.7% year on year‚ picking up slightly from 11.6% in November.

The CPI’s transport component rose 5.7% last month from a year ago.

Rand Merchant Bank analyst Gordon Kerr said yesterday ahead of the release that most economists forecast the peak in CPI to have been in last year’s fourth quarter, and a gradual move back downwards into the target band next year.

Analysts from Nedbank Corporate and Investment Banking said South Africa’s economic growth outlook had improved off a low base last year and was expected to be 1.2% this year.

They said that if CPI came in as expected below the 6% upper band throughout the year‚ on lower food inflation‚ this would provide the Reserve Bank with some impetus for a flatter interest rate profile this year.

The bank’s monetary policy committee is meeting next week.

Yesterday, South African bonds were slightly weaker following the release of the data.

Inflation erodes the purchasing power of a bond’s future cash flows, so higher rates of inflation mean investors will demand higher yields to compensate for their inflation risk.

Rand Merchant Bank’s John Cairns said domestic inflation had been expected to decrease to 6.4%‚ at which point it would have been the start of a disinflationary trend that would open the way for interest rate cuts in May.

The bid on the R186 bond was 8.68% from Tuesday’s 8.64%.

The bid on the R207 was 7.96% from R7.92%.